Reducing Capacity Payments

Reports have emerged that following the IMF’s review, Pakistan has assured the international lender that it will strive to reduce capacity payments to CPEC power projects either by renegotiating deals or having loans rescheduled. Apparently, a written assurance has been given in the Memorandum for Economic and Financial Policies (MEFP), which the IMF released on Friday as part of its combined staff level report of the 7th and 8th reviews of the Extended Fund Facility (EFF) programme.
The IMF has a history of opposing CPEC projects and the new report maintains that the second-phase of the CPEC investment could pose a risk to debt sustainability in Pakistan. Though the infrastructure in these second-phase investments could raise growth prospects, the IMF argues that attendant contingent liabilities also pose a risk to debt sustainability. Sources reveal that Pakistan owes over Rs260 billion to Chinese Independent Power Producers (IPPs) and that the IMF had linked this repayment with the condition to renegotiate CPEC deals. However, reopening these deals will not sit well with Beijing and Islamabad will have to delicately handle this situation.
Thus far, 11 Chinese IPPs, set up with an investment of $10.2 billion, are operational, having a total generation capacity of 5,320 MW. There are differing assessments on the matter, especially when it comes to Chinese officials. Those in the power sector contend that the root cause of the circular debt in the power sector was emanating from around Rs500 billion annual transmission and distribution losses, not the CPEC IPPs deals. Therefore, the emphasis should be on addressing transmission and distribution issues, instead of focusing on power generation.
In addition to this, renegotiating and restructuring debt will not be easy as the financial impact could be between Rs10 billion – Rs 50 billion annually. Moreover, in order to achieve this, all the involved international parties would have to change their guarantee or investment body. Pakistan will have to make sure that it does not rub either party the wrong way considering how commitments have been made. In terms of holding DISCOs accountable, it is claimed that they are responsible for 95 percent of circular debt issues. This is something that we must look into urgently as non-collection has been a serious issue and addressing hurdles such as power theft and line losses can result in significant savings.

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